Estate Plan Valuation Changes | RKL LLP
Posted on: August 23rd, 2016

Days Numbered for Common Estate Planning Technique

Days Numbered for Common Estate Planning TechniqueRegulations that would restrict the use of a common estate planning technique are moving through the approval process in Washington, D.C. The U.S. Treasury Department and IRS earlier this month issued proposed regulations regarding a technique used to transfer interests in family businesses at a reduced value. These proposed changes seek to prevent undervaluation of transferred interests, but will result in the elimination of a significant gift and estate tax benefit.

What is the current practice for business transfers?

Under the current laws, transfers by an individual or their estate in excess of the $5.45 million exemption amount are subject to estate and gift tax. For married couples, the exemption amount is $10.9 million. The estate and gift tax applies at a top rate of 40 percent on values in excess of these exemption amounts, so the elimination or reduction in discounts applied to ownership interests will have a sizable impact on the gift or estate tax due.

How would these regulations impact my estate plans?

The proposed regulations under Internal Revenue Code Section 2704 would severely limit the applicability of sizeable discounts commonly applied to ownership interests in Family Limited Partnerships (FLPs) and Family Limited Liability Companies (FLLCs) for estate, gift and generation-skipping transfer tax purposes. Under the new regulations, the determination of fair market value for interests transferred via FLPs and FLLCs would disregard certain restrictions in operating and partnership agreements. This would essentially eliminate the valuation discounts for lack of control and lack or marketability, which often can result in tax-friendly reductions ranging from 20 to 50 percent.

When will these regulations take effect?

The proposed regulations are open for public comment, for a period of 90 days after their initial release on August 2, 2016. The regulations would then take effect 30 days after finalization by the U.S. Treasury. It is important to note that these regulations will be applied prospectively, not retroactively, so there is still time to take advantage of the discounts up until the effective date.

RKL’s Business Consulting Services Group will continue to monitor these proposed regulations. Individuals or businesses in the midst of estate planning projects should consider accelerating their timelines to take advantage of these discounts while they are still fully available. Have questions as to how this may impact your business ownership transfer plans? Contact your RKL advisor or one of our local offices today.

Paula K. Barrett, CPA/ABV, CVA, CGMAContributed by Paula K. Barrett, CPA/ABV, CVA, CGMA, partner in RKL’s Business Consulting Services Group. Paula specializes in business valuation and litigation support services, assisting clients in the acquisition or sale of closely-held businesses and general business planning services. She also has experience in tax-exempt bond financing services, including bond verifications and arbitrage rebate computations.


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